Li Ka-shing companies in HK$43bn offer for Australia’s Duet Group

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A consortium made up of three listed firms controlled by tycoon Li Ka-shing has agreed to offer up to A$7.53 billion (HK$43.8 billion) to fully take over Australian electricity and natural gas distributor Duet Group.

For the transaction, the three firms agreed to form a joint venture in which Cheung Kong Property Holdings and Cheung Kong Infrastructure (CKI) will each own 40 per cent, while Power Assets will have a 20 per cent stake, if the joint venture is approved by all three companies’ independent shareholders. The shareholding structure may change depending on the outcome of the approvals.

“The consortium members believe that the target’s energy utility assets in Australia, the United States, the United Kingdom and Europe represent an attractive opportunity for investors with the potential for growth opportunities,” CKP, CKI and Power Assets said in a joint filing to Hong Kong’s exchange on Monday.

CKI was the first Li-led company that made what Duet called an “unsolicited, indicative, incomplete, non-binding and conditional proposal” just over a month ago.

Duet said in a filing to Australia’s stock exchange on Monday that its board has “unanimously” recommended its shareholders to accept the consortium’s offer. The offer was 28.9 per cent higher than Duet’s closing price prior to the indicative offer last month. It represents a 13.1 enterprise value to earnings before interest, taxes, depreciation and amortisation (ebitda) multiple.

Credit Suisse analysts estimated in a note on Monday that the acquisition could raise CKI’s earnings per share by 3 per cent in 2017, and that of Power Assets by 2 per cent, after considering the deal’s financing cost.

Credit Suisse’ analysts estimated in a note on Monday, the acquisition could raise CKI’s earnings per share by 3 per cent in 2017, and that of Power Assets by 2 per cent, after considering the deal’s financing cost.

An offer worth A$2.9 per share was first made in November, which was raised to A$3 in December, and finally increased to A$3.03, Duet said.

Analysts had expected Power Assets to join CKI in the bid since the two firms have made joint acquisitions many times before, and given that Power Assets had a cash pile of HK$66 billion at the end of June that it is under pressure to deploy, compared to CKI’s HK$11.3 billion.

The participation and leadership role by CKP could come as a surprise to some in the market.

“[CKP] is the only bidding party with the size and immediate resources to make an offer conditional only upon the conditions set out,” the joint filing said, in reference to CKP’s leadership role in the consortium.

On Monday CKP’s share price closed 1.4 per cent lower at HK$49.6 after falling as much as 3 per cent. CKI gained 1 per cent to HK$61.55, and Power Assets jumped 2.8 per cent to HK$72.5 after gaining as much as 4 per cent. The Hang Seng Index closed 0.96 per cent lower.

“In the current cyclical stage of the local property market, high property prices have presented risks, rendering it challenging to identify property investments with reasonable returns.

“[CKP] has therefore given serious and prudent consideration to and participated in quality global investments that meet the investment criteria set out in its 2015 annual report, with a view to extending its reach to new business areas to enhance its revenue streams and supplement the cyclical impact on cash flow associated with property investment.”

The bid for Duet would be CKP’s second major move into non-property investment in just over a month, after it announced early December it would pay HK$7.6 billion for an aircraft leasing unit from sister conglomerate firm CK Hutchison, also controlled by Li.

CKP cited at the time the “steady income stream” of the leasing business as a reason for the diversification.

In a separate filing on Monday, Power Assets, said that its board will decide on January 26 whether to declare a special interim dividend for 2016 of HK$5 per share.

Given that the company has 2.13 billion issued shares, the payout could amount to HK$10.67 billion, according to the South China Morning Post’s calculation.

Duet posted a net profit of A$217 million in the 12 months to June 30, up from A$46 million in the preceding 12 months, and A$193 million in the 12 months to June 30, 2014.

Duet’s net asset value amounted to A$3.41 billion on June 30, 2016.

We are confident to be able to get approval from Australia’s Foreign Investment Review Board

Andrew Hunter, CKI deputy managing director

The numbers imply the current bid price represents 34.7 times the latest historical financial year earnings, and 2.2 times its net asset value.

If the board of Duet subsequently recommends a competing proposal, Duet is liable to pay a US$47 million “break up fee” to the joint venture, the joint filing said.

Analysts had earlier noted the risk that the bid by the Li-controlled firms could be rejected by the Australian government, even though it could bring operational advantages if approved.

They cited the fact that CKI’s bid for Duet’s peer Ausgrid was rejected in August 2016 on the grounds that it went against national interests, and concerns that the deal might give CKI a dominant position in the market as it already owns similar assets in regions near Duet’s operations.

“One possible complication would be that post-acquisition CKI and [39 per cent-owned utilities firm Power Assets] would end up owning three of the five power distribution networks [in Victoria State] and two of the three Victorian gas networks,” UBS head of Asian utilities research Simon Powell wrote in a note last month.

The takeover is subject to approval by the Australian government, including approval by the Foreign Investment Review Board.

CKI deputy managing director Andrew Hunter told reporters on Monday via teleconference that the bidding consortium is confident of getting government approval in Australia since the nation’s competition commission has confirmed it has no objection to the bid.

“We are confident to be able to get approval from Australia’s Foreign Investment Review Board also, otherwise, we wouldn’t have made this offer and I suspect Duet’s board wouldn’t have recommended this offer to its shareholders,” he said.

After engaging with the board for two months, CKI managing director Kam Hing-lam said the review board has not raised any concern considered by the consortium to be “insurmountable,” adding that senior Australian officials have said that the approval process under which CKI’s bid for Ausgrid was rejected last year was “unique and didn’t set a precedence”.

CKI vice chairman Edmond Ip Tak-chuen said he expects the takeover to be completed by around May. Ip, who is also an executive director of Cheung Kong Property, said non-property assets will account for less than 20 per cent of CKP’s total assets even if it buys 100 per cent of Duet, and after completing the aircraft leasing acquisition.

CKP’s share price Monday closed 1.4 per cent lower at HK$49.6 after falling as much as 3 per cent. CKI gained 1 per cent to HK$61.55, and Power Assets jumped 2.8 per cent to HK$72.5 after gaining as much as 4 per cent. The Hang Seng Index closed 0.96 per cent lower.